Coyote Blog

As I have pointed out any number of times, when supplies of something are short, you can allocate them either by price or by rationing.  Robert Rapier, via Michael Giberson made the point that combining shortages with tough state price-gouging laws inevitably led to rationing and long lines:

Someone asked during a panel discussion at ASPO whether we were going
to have rationing by price. I answered that we are having that now. But
prices aren't going up nearly as much as you would expect during these
sorts of severe shortages. Why? I think it's a fear that dealers have
of being prosecuted for gouging. So, they keep prices where they are,
and they simply run out of fuel when the deliveries don't arrive on
time. If they were allowed to raise prices sharply, people would cut
back on their driving and supplies would be stretched further.

Neal Boortz made the same point yesterday, as the gas shortages in the southeast dragged out (unsurprisingly) for a second week:

nearly 200 gas stations in Atlanta are being investigated for price gouging.  Don't investigate them!  Reward them!  Price gouging is exactly what we need!  It should be encouraged, not investigated....

The real problem now is panic buying.  People will run their tanks
down by about one-third and then rush off to a gas station.  Lines of
cars are following gas tanker trucks around Atlanta. The supplies are
coming back up, but as long as people insist on keeping every car they
own filled to the top and then filling a few gas cans to boot, we're
going to have these outages and these absurd lines. 

So, how do you stop the panic buying?  Easy.  You let the market do
what the market does best, control demand and supply through the price
structure.  The demand for gas outstrips the supply right now, so allow
gas stations respond by raising the price of gas .. raise it as much as
they want.  I'm serious here so stop your screaming.  The governor
should hold a press conference and announce that effective immediately
there is no limit on what gas stations can charge for gas.  I heard
that there was some gas station in the suburbs charging $8.00 a
gallon.  Great!  That's what they all should be doing.  Right now the
price of gasoline in Atlanta is artificially low and being held down by
government.  That's exacerbating the problem, not helping it.  Demand
is not being squelched by price. 

As the prices rise, the point will be reached where people will say
"I'm fed up with this.  I'll ride with a friend, take the bus or just
sit home before I'll pay this for a gallon of gas."  Once the price of
a gallon starts to evoke that kind of reaction, we're on our way to
solving the problem.  When gas costs, say, $8.00 people aren't going to
fill their tanks.  They also aren't going to rush home to get their
second car and make sure it is filled up either ... and you can forget
them filling those portable gas cans they have in the trunk.  Some
people will only be able to afford maybe five gallons!  Fine!  That
leaves gas in the tanks for other motorists.  Bottom line here is that
people aren't going to rush out to fill up their half-empty tanks with
$8.00 gas.

Here is something else to think of about lines and shortages.  What is the marginal value of your time?  I think most people underestimate this in their day to day transactions.  Some will say it is whatever they make an hour at work, and that is OK, but I will bet you that is low for most folks.  Most folks would not choose to work one more hour a week for their average hourly rate.  Start eating into my free time and family time, and my cost goes up.  That's why overtime rates are higher.   

So let's say an individual values his/her time at the margin for $25.  This means that an hour spent waiting in line or driving around town searching to fill up with 10 gallons raises the cost by $2.50 a gallon.  And this does not include the fuel or other wear on the car used in the search.  Or the cost of that sales meeting you missed because you did not have the gas to get there.  So an anti-gouging law that keeps prices temporarily down by a $1 or so a gallon may actually cost people much more from the shortages it creates.